Focus on lower-credit borrowers paying dividends

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The FHA 203k loan program provides home buyers the opportunity to buy and fix up a property, without exhausting their personal savings.

Carrington Mortgage Service’s announcement in March that it would increase its focus on borrowers in the sub-640 FICO range was a boon to underserved home buyers. But the decision also makes sound business sense, according to Carrington exec Raymond Brousseau.

“It’s a huge untapped market,” says Brousseau, Carrington’s executive vice president of mortgage lending. “One third of the borrowing public has a FICO score under 650. There are very few folks fighting for that business.”

Carrington, on the other hand, has lowered its minimum credit requirement to a FICO score of 550 and expanded its guidelines on several FHA, VA and USDA loan programs. While that’s not a viable strategy for every originator, Brousseau says Carrington is uniquely equipped to make it work.

“The company itself is made up of 15 different organizations, one of which is a specialty servicer … that services all the originations that we produce,” he says. “That relationship between the originator and the servicer – we’re linked at the hip. If we were just originating loans and counting on someone else to service them, we would not be raising our hand for this market. But the combination of servicer and originator makes us a bit unique.”

Tapping the underserved market helps Carrington stand out from the pack, Brousseau says.

“We’re committed to the origination space, and it’s shrinking. Lenders such as Carrington need to differentiate themselves,” he says. “…Volumes are shrinking, and it’s going to be tougher to compete for that small amount of the pie. We found that going after that underserved market differentiates us from others, in part because our history and our DNA equips us to do it.”

But it’s not just the servicing side that equips Carrington to pursue the underserved market.

“That’s half the equation, and the other half is the originator – my business,” Brousseau says. “Over the last two years we’ve been building the infrastructure necessary to do this type of underwriting. … We’ve doubled our operations personnel over the last 18 months. This kind of lending requires you to do what’s called manual underwriting, which is more of a common-sense kind of underwriting. If you’ve got a FICO score of 700, the underwriting is probably going to be automated. In these loans, where the FICO score is in the low 600s or below 600, they’ve got to be underwritten manually. Not every company is equipped to do that. We expect that up to 40% of our underwriting decisions will be manually underwritten, and there just aren’t that many businesses out there today that have that kind of talent.”

And that talent – plus a long period of preparation – is already paying dividends, Brousseau says.

“There’s a market not currently being served where there’s a substantial amount of pent-up demand,” he says. “…They lost their part-time job, they lost their overtime … and now coming out of the recession a handful of years later, they want to get back into owning a home. We believe people like that are worthy of our consideration. We’ve reached out to that population of borrowers, and they seem to be responding extremely well. And it is risk-based pricing, so there is an opportunity to earn a fair amount of revenue there.”